Tuesday, April 21, 2015

Has Wolfgang Münchau gone over to the Dark Side on Greece?

Wolfgang Münchau of the Financial Times and Spiegel Online has been one of the most informative and perceptive commentators on the euro crisis. He has explained repeatedly how deflationary, pro-cyclical austerity policies have not only been damaging the eurozone economy in general. But also how piling more debt onto Greece as part of the so-called bailout made Greece's debt position even more untenable at the same time the austerity policies imposed by Berlin via Brussels, Frankfurt and Washington (the EU Commission, the ECB and the IMF, the institutions formerly known as the Troika) were shrinking Greece's economy severely.

And, as we hear from Greece's Finance Minister in the video below, only 9% of the so-called bailout even went to the Greek people in any form; the rest was devoted to bailing out private banks.

After years of Merkel's Herbert Hoover/Heinrich Brüning economics, the Greek people were hit hard. Paul Krugman in Notes on Greece 04/19/2015 illustrates the severity of the austerity policies there:

Greece has made an incredible adjustment — close to 20 percent of potential GDP, or the U.S. equivalent of about $3 trillion per year (not our usual 10-year calculation) in spending cuts and tax hikes:

Greece has accepted roughly a 25 percent cut in nominal private-sector labor costs, or more than 30 percent relative to the euro average, far more than anyone else:

Krugman argues, "If Greece can negotiate a halfway reasonable compromise, one that more or less pauses further austerity, it’s hard to see that the risks of exit would be worth it." (my italics)

It was in this grim situation that Greek voters elected SYRIZA in January, giving them only two seats short of a Parliamentary majority. To form a government, now Prime Minister Alexis Tsipras made a coalition with the small Anel party, which despite their rightwing populist cast was the only potential coalition partner that shared SYRIZA's central position on Europe that Greece would end the austerity policies by negotiating new arrangements within the eurozone. (See my post SYRIZA makes a governing coalition in Greece/Alexis Tsipras sworn in as Prime Minister 01/26/2015)

They faced a series of deadlines of which the most key one still seems to be the July-August period when major installments on debt payments are due that Greece cannot make without new arrangements. Tsipras and Varoufakis have made it clear they are not looking for a technical debt reduction, a "haircut." But the payment schedule would have to be restructured for it to be workable, i.e., restructured in such a way that it would de facto function in the same way as a haircut.

Greek debt is currently at around 175% of GDP, completely unsustainable for a country not borrowing in its own currency (the debt is euro-denominated) and stuck in a severe depression. Current agreements with the institutions formerly known as the Troika require Greece to run a 4.5% primary surplus, the national budget surplus prior to debt service payments, for years to come. This is a level of sustained budget surpluses that not even wealthy countries like Germany have sustained. And it's required not to stimulate Greece's badly damaged economy but to pay off Greece's absurd levels of unsustainable debt.

Merkel since the start of the crisis in 2008 has exercised German dominance in the eurozone in a nationalistic way. But she has done so in defense of the "ordoliberal" doctrine in which she actually seems to believe and on which her Hoover/Brüning policies for the periphery countries like Greece and Spain have been based. At the minimum, she seems highly attached to it as an instrument of control for herself and Germany within the eurozone.

So Merkel, with the institutions and other countries of the eurozone backing her, has been putting the squeeze on Greece. Her goal is clearly to force Greece to submit to the austerity policies the SYRIZA government was elected to change. If Greece can escape the austerity cage, anti-austerity parties in Spain, Portugal and Greece could come to power committed to the same goal.

Before becoming Finance Minister, Varoufakis had discussed how it would be beneficial for Greece, if it is going to default, to do so as part of the eurozone so that eurozone institutions like the ECB would be under pressure to use their authority to remedy some of the consequences of a default.

Default does not automatically mean a "Grexit," as Greek exit from the euro is known. The current party line from Merkel's government is that a Grexit would be no big deal, which Münchau seems to accept as reasonable in his column. This is a dubious assumption at best. There's a very good chance that a Greek default would create new debt crises in Spain, Portugal and even Italy.

Tsipras and Varoufaks also seem to be firm in not voluntarily exiting the euro. If Germany forces them out, that could also generate crises in other periphery countries and vastly increase the liklihood that other hard-hit countries like Ireland, Italy, Spain and Portugal would rush to bail out of the euro, also. This would be a messy process which would create a lot of dislocation and short-term hardship. And in that situation, any country exiting the euro that kept applying austericide policies would turn short-term into longer-term hardship.

A crackup of the eurozone would deprive Germany of the longer-term advantage it has gained as an export-oriented nation that benefits from the fact that the euro is a cheaper currency than a separate German currency would be. At the moment, the euro is so low as a result of the austerity policies creating such long-term weakness in the eurozone that Germany's trade surplus are so high that they are themselves becoming a problem. Ironically, in view of his drastic turnaround on Greece, Münchau addressed that issue very pragmatically in Warum Deutschlands Investitionen so schwach sindSpiegel Online 13.04.2015, rightly noting that the German One Percenters foolishly want to apply the same solution to that they have for a trade surplus they consider too low: drive down workers' wages!

But more directly relevant to this year's negotiations is that a eurozone crackup would deprive Germany and its Chancellor of the political power they currently enjoy in the eurozone and the European Union. Merkel may really believe in her ordoliberalism. But she's very much a Machtmensch, the German equivalent to the American "political animal." As the leading power in the EU, Germany can be a significant player in world politics. Outside the EU, it can look forward to being a minor power for the rest of this century.

Münchau in his April 20 column seems to be abandoning his previous Keynesian analysis of Greece's situation for the Hoover/Brüning approach that has wrecked it. He joins Merkel and her followers in scolding Greece for not proposing good enough "reforms" in its negotiations. As Münchau surely know, Greece has proposed to focus immediately two reforms that are standard parts of the neoliberal prescription list, fighting corruption and improving tax collection, i.e., cracking down on tax dodgers.

One of the things this year's Greek-German confrontation has highlighted is that Merkel and the EU elite don't give a flying flip about fighting corruption or improving tax collection. If debt payments are really their overriding concern, improving tax collection would seem to be a sensible priority. But One Percenters in Greece and elsewhere are the prime beneficiaries of corruption and tax dodging. Merkel and the institutions formerly known as the Troika are really interested only in the elements of the neoliberal prescription that lower living standards for ordinary people: privatization, cutting wages, weakening unions, cutting pensions and social supports, reducing public services, deregulation of banks and businesses. This is what Merkel and the former Troika mean when they talk about "reforms."

What Greece needs is economic stimulus, pretty much anything that would increase domestic demand. But Münchau heaps scorn on Tsipras' government for restoring some pension cuts. With youth employment north of 50% and general unemployment extremely high, any increases in pension payments would go almost 100% into immediate consumption, providing exactly the kind of immediate stimulus Greece so badly needs. As Varoufakis notes in the video starting around 31:00, only 9% of the unemployed in Greece are receiving unemployment benefits, meaning that the critical business cycle stabilizer that unemployment insurance should be is not close to be fulfilled in Greece under Merkel's austerity policies.

Münchau also expresses dismay that Greece isn't making any kind of concrete preparations for leaving the eurozone and reverting to their own currency. But Greek policy is to remain in the eurozone, not to leave it. Tsipras and Varoufakis have made that clear consistently both in the election campaign and since they've taken office. It's also part of their negotiating strength that if they rule out initiating a Grexit themselves, they can force Germany into pushing them out and bear the blame for the likely terrible immediate consequences. Merkel obviously likes high risk. But it seems very unlikely that her political instincts will suggest to her than being in that position is in any way desirable. Why would the Greek government allow any indication that they were preparing for a Grexit when that would undercut not only their explicit policy of staying in the eurozone but also their immediate negotiating position?

And, BTW, there has been no indication that the explicit policy is in any way a smokescreen. Staying in the eurozone is their policy.

[The contrast {is} striking between Varoufakis and the Ukrainian Finance Minister Natalie Jaresco, who at the Peterson Insitute on the other side of the street {from the above appearance of Varoufakis at the Brookings Institute} on the same day spelled out in meticulous detail the reforms that her country has undertaken and those it will undertake. Greece received over €200 billion in assistance from the EU. From Greece comes a sermon. From the Ukraine comes constructive proposals. The Greek government is on the point of losing the few friends they still have in Europe. I would also count myself in that group.}

Wie bitte? (Say what?)

It's symbolically important that he notes Ukraine's Natalie Jaresco was giving her address at the stone-conservative Peterson Institute, founded primarily to lobby for the privatization of the US Social Security system so investment bankers like Pete Peterson could suck up a huge portion of that massive cash flow into investment fees for themselves. Jaresco was an American citizen until literally the day she became the Ukrainian Finance Minister. At a time when Ukraine is involved in a high-stakes confrontation with Russia, the current government accepted an austerity program imposed by the IMF. If NATO wants to bolster Ukraine in this situation, austerity policies seem to work directly against that purpose.

The crisis the previous, pro-Russian government there experienced in 2014 which lead to its overthrow, much to the delight of American neoconservatives, was kicked off when that government declined an association agreement with the EU in major part because it required severe austerity measures. The current government, on which NATO is staking a lot, happily embraced austerity measures that hit ordinary Ukrainians hard. And this is the model Münchau recommends to Greece?

It's possible that Jaresco may genuinely believe that such policies are a good idea for Ukraine. But there may also be a good reason that you needed someone who had never been an actual Ukrainian citizen to be Finance Minister to implements such "reforms." (I recently posted on her in Ukraine's American Finance Minister, Natalie Jaresko 04/12/2015)

Münchau mentions neither that the bulk of that "assistance" went to private banks or that Greece was required to take on additional debt to repay it. As Charlie Pierce might say: honky, please.

And where are those few friends in Europe to which Münchau refers? Münchau had previously sounded like a friend of Greece in this matter. But now that Greece is actually pushing for the kind of Keynesian solutions that his own previous analysis indicated they need, he throws in with Angela "Darkseid" Merkel. With friends like those ...

But have their actual friends in Europe like Podemos and its supporters in Spain turned on them? Not that I can see. And if Podemos comes to power at the national level in Spain in next year's election, they would be able to provide significant diplomatic support within the eurozone and the EU to Greece and other periphery countries.

The bottom line is what Krugman says, that Greece has to have "a halfway reasonable compromise, one that more or less pauses further austerity."

Without that, they're left with what Varoufakis back in 2013 (and now somewhat infamously) described this way, "And stick the finger to Germany and say, well, you can now solve this problem by yourself, right?"

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